New plant ramp-up
Follow a new plant’s revenue, EBITDA and pre-tax return on capital as its utilisation rises, to see why returns look poor in the first year and what a slow ramp-up costs.
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How to use this calculator
Each step names a control you will find on screen above.
- Capex and asset turnover
The plant’s cost and the revenue it can produce at full use, as a multiple of that cost. Companies often state an expected asset turnover when announcing capex.
- Contribution margin and fixed costs
Revenue left after raw materials and other variable costs, as a percentage; and the plant’s fixed operating costs each year.
- Depreciation life
Years over which the capex is depreciated, on a straight line. Depreciation is subtracted from EBITDA to reach EBIT.
- Utilisation in years 1 to 3
The ramp-up path. The table also shows the plant fully used, for comparison.
Worked example: A ₹1,000 crore plant filling up
A specialty chemical plant costs ₹1,000 crore, can turn over 1.5× its cost at full use, earns a 30% contribution margin, has ₹150 crore of fixed costs and is depreciated over 20 years. It runs at 40%, 70% and 90% in its first three years.
What to enter
- Capex
- ₹1,000 Cr
- Asset turnover at full use
- 1.5× capex
- Contribution margin
- 30% of revenue
- Fixed costs
- ₹150 Cr / yr
- Depreciation life
- 20 years
- Utilisation, years 1, 2 and 3
- 40%, 70%, 90%
What it shows you
- Year 1 revenue / EBIT / ROCE
- ₹600 Cr / −₹20 Cr / −2.0%
- Year 2 revenue / EBIT / ROCE
- ₹1,050 Cr / ₹115 Cr / 11.5%
- Year 3 revenue / EBIT / ROCE
- ₹1,350 Cr / ₹205 Cr / 20.5%
- Full use revenue / EBIT / ROCE
- ₹1,500 Cr / ₹250 Cr / 25.0%
Where this is taught
A calculator gives you a number. These explain what the number means and when it misleads you.
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